Korn Ferry (NYSE:KFY) reported its second-quarter fiscal 2025 earnings, revealing a miss on earnings per share (EPS) compared to analyst expectations. The company's stock reacted negatively, dropping by 6.84% in pre-market trading.
Key Takeaways
- Korn Ferry's EPS of $1.14 fell short of the forecasted $1.21.
- Revenue remained nearly flat at $674 million, down 4% year-over-year.
- The company's stock dropped 6.84%, reflecting investor disappointment.
- Korn Ferry launched new products and made strategic acquisitions.
- Forward guidance suggests a seasonal decline in the next quarter.
Company Performance
Korn Ferry's performance in the second quarter of fiscal 2025 showed resilience amidst challenging market conditions. The company maintained its revenue at $674 million, a 4% decrease from the previous year but stable compared to the prior quarter. Despite the revenue decline, Korn Ferry improved its adjusted EBITDA margin for the sixth consecutive quarter, reaching 17.4%. The company's diversified business model, particularly in recruitment process outsourcing (RPO) and executive search, continues to provide a competitive edge.
Financial Highlights
- Revenue: $674 million, down 4% year-over-year.
- Adjusted EPS: $1.14, up 25% year-over-year.
- Investable cash position: $537 million, up 16% year-over-year.
- Shareholder returns: $95 million through dividends and share repurchases.
Earnings vs. Forecast
Korn Ferry's actual EPS of $1.14 fell short of the analyst forecast of $1.21, marking a miss of approximately 5.79%. This miss contrasts with the company's historical trend of meeting or exceeding expectations, indicating a potential shift in market conditions or operational challenges.
Market Reaction
Following the earnings announcement, Korn Ferry's stock price declined by 6.84%, closing at $73.27 from the previous close of $78.65. This movement places the stock closer to its 52-week low of $52.06, highlighting investor concerns over the company's ability to meet earnings expectations. The broader market trends and sector performance have been relatively stable, suggesting that the stock's decline is primarily due to company-specific factors.
Company Outlook
Looking ahead, Korn Ferry has provided guidance for the third quarter, expecting fee revenue between $635 million and $665 million. The company anticipates an adjusted EBITDA margin of 16.5% to 17.3% and adjusted diluted EPS ranging from $1.06 to $1.18. The acquisition of Trilogy International is expected to contribute $14 million to $15 million in the upcoming quarter, aiding the company's expansion in the EMEA region.
Executive Commentary
CEO Gary Burnison remarked, "Our execution has been outstanding," emphasizing the company's focus on profitability. CFO Bob indicated optimism for the future, stating, "We're at the beginning of what is going to be a very long ballgame and I truly believe our best is yet to come." These comments reflect management's confidence in their strategic direction and long-term growth prospects.
Q&A
During the earnings call, analysts inquired about the digital business and RPO performance, noting strong new business growth and promising signs with new logo acquisitions. Concerns were raised regarding the consulting segment, which faces challenges due to longer implementation times for larger contracts. Management reassured investors that the interim market is expected to recover without structural changes.
Risks and Challenges
- Continued decline in temporary staffing penetration rates could impact revenue.
- Slow hiring and firing environments may affect demand for Korn Ferry's services.
- Longer implementation times in consulting could delay revenue recognition.
- Potential macroeconomic pressures might influence client budgets and hiring plans.
- Integration challenges from recent acquisitions could pose operational risks.
Full transcript - Korn Ferry (KFY) Q2 2025:
Leah, Conference Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 2025 Conference Call. At this time, all participants are in a listen only mode. Following the prepared remarks, we will conduct a question and answer session.
As a reminder, this conference call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at kornferry.com a copy of the financial presentation that we will be reviewing with you today. Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performances, plans and goals constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the company believes the expectations reflected in such forward looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of the number of risks and uncertainties, which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2024 and in the company's soon to be filed quarterly report for the quarter ended October 31, 2024. Also, some of the comments today may reference non GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning measures, including reconciliations to the most directly comparable GAAP financial measure is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's website at www.kornferry.com.
With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.
Gary Burnison, CEO, Korn Ferry: Okay. Thank you, Leah. Good afternoon, everybody. Thank you for joining us and season's greetings. The team is going to get into the results in more detail.
But overall, I would say our execution has been outstanding. Earnings and profitability increased year over year and sequentially, the margin over the EBITDA margin over 17% is our 6th consecutive quarter of profitability improvement and the diversification of our business was evident again in the quarter. Stability in our talent acquisition business, digital new business trends improving and steady performance in consulting. And we also continue to invest. For example, over the last several quarters, we've made significant investments to productize our IP and proprietary data assets, including the 100,000,000 assessments we have, 10,000 success profiles, rewards data on 28,000,000 people covering 30,000 organizations and all of that enables our clients to maximize their talent and organizational performance at scale.
And part of that investment was reimagining and developing a new HR integrated software platform, the Korn Ferry Talent Suite, which we launched in the quarter and reflects our commitment to invest in and expand our highly differentiated IP and products. The Talent Suite brings together all of our talent management capabilities, our assessment data, development data, reward solutions, allowing our clients to license our decades of expertise, proprietary insights and data driven intelligence via subscription agreements to power their decisions. The move is pivotal for all parts of our organization, a connected approach with stronger market presence and actually more impactful solutions. And we also made an investment in the quarter that I'm really excited about, Trilogy International, which substantially expands our interim professional offerings to EMEA and North America. With its digital and technology focused, Trilogy operates at the forefront of change in a large addressable market for us.
We're also continuing to focus on our marquee and regional account strategy that represents 38% of our portfolio and almost all of our marquee clients use at least 3 of our service offerings. And finally, it's our own people strategy with global colleagues who continue to operate at high performance levels, while we also attract and develop additional talent required to actualize our strategy. And finally, for any organization, the journey begins with the why. And for Korn Ferry, the why is to enable people in organizations to be more than. I'm joined today by Tiffany, Greg and Bob, and I'll have them get into a little bit more detail here, then we'd be happy to obviously take your questions.
Bob, over to you.
Bob, CFO, Korn Ferry: Great. Thanks, Gary. Good afternoon and good morning. As Gary said, we're pleased with our results for the Q2 of FY 'twenty five. We continue to carefully guide our business through this period of uncertainty, managing what we can control and delivering improvements in profitability for now 6 consecutive quarters.
In short, we've continued to successfully execute our strategic plan, capitalizing on our unique solution sets, while focusing on cost discipline and operating productivity, which has positioned our business with much greater capacity for investment and growth going forward. As I said, our adjusted EBITDA margin now increased for 6 consecutive quarters and is up 3 40 basis points year over year as bill rates have remained strong and employee productivity continues to improve. Our interim bill rates grew year over year by 11% and our consulting bill rate was steady at almost $4.20 an hour. Our overall productivity as measured by fee revenue per employee is now 35% higher than pre pandemic levels. Our top line growth trends continue to show early signs of improvement with 2nd quarter consolidated fee revenue of about $674,000,000 with all lines of business showing sequential growth or stability.
Consolidated new business growth also improved in the 2nd quarter and was down less than 1% year over year, but up 3% sequentially. New business for executive search and digital were strong in the 2nd quarter, up 4% and 11% year over year, respectively. We also continue to effectively deploy capital and that includes a return of capital to shareholders. It's a priority for us. In the Q2, we repurchased $33,000,000 of stock or about 456,000 shares.
And in addition, we paid a quarterly dividend of $0.37 per share. Now we remain confident that we can maintain our current level of profitability while investing in both consultant additions as well as the capital investments targeted capturing future growth that Gary referred to. Now let me return the call back over to Greg, who can take us through some
Greg, Financial Executive, Korn Ferry: of the overall company financial highlights. Okay. Thanks, Bob. Consolidated fee revenue in the Q2 of fiscal 'twenty five was down 4% year over year, but flat sequentially stabilizing at $674,000,000 By line of business, consulting fee revenue was down 6% year over year and flat sequentially, while digital was down 4% year over year, but up 5% sequentially driven by in part by strong new business in the Q2. Our permanent placement talent acquisition solutions continued to show signs of stability in the Q2.
Executive search fee revenue grew 1% year over year. RPO fee revenue was essentially flat year over year, while permanent placement professional search stabilized at down 6% year over year and was sequentially flat. Market demand for our professional interim services remained challenging in the 2nd quarter, in line with overall industry trends. Interim fee revenue in the 2nd quarter was down approximately 17% year over year, but flat sequentially. Consolidated new business growth trends improved in the 2nd quarter.
Excluding RPO, new business in the 2nd quarter was down only 1% year over year compared to down 3% year over year in the Q1 of fiscal 'twenty five. New business growth was mixed by line of business and strongest for digital and executive search, which were up year over year by 11% and 4%, respectively. Consulting new business was stable and down 3% year over year compared to down 3% year over year in the Q1 of fiscal 'twenty five, while professional search and interim new business was down 12% year over year in the second quarter, improving from down 14% year over year in the Q1 of fiscal '25. Like fee revenue, year over year new business growth trends in the Q2 for permanent placement professional search were better than for interim solutions with both stable measured sequentially. New business in the 2nd quarter for RPO was strong with $101,000,000 of new awards, which includes $41,000,000 of renewals and extensions and $60,000,000 of new logo assignments.
Earnings and profitability continued to grow in the 2nd quarter, driven by both greater consultant and execution staff productivity and disciplined cost management across all lines of business. Consolidated adjusted EBITDA in the 2nd quarter grew $18,000,000 or 19% year over year with adjusted EBITDA margin improving for the 6th consecutive quarter to 17.4%. Adjusted fully diluted earnings per share in the 2nd quarter were $1.21 up $0.24 or 25% year over year. Fully diluted earnings per share measured by GAAP were $1.14 in the 2nd quarter. Our investable cash position at the end of the 2nd quarter was $537,000,000 which was up $73,000,000 or 16 percent year over year.
Through the end of the Q2 of fiscal 'twenty five, we deployed $129,000,000 of cash, investing $25,000,000 in capital expenditures, using $9,000,000 for debt service and returning $95,000,000 to shareholders, dollars 39,000,000 in dividends and $56,000,000 repurchasing approximately 808,000 shares. Now I'll turn the call back over to Tiffany to review our operating segments in more detail.
Tiffany, Segment Leader, Korn Ferry: Thanks, Greg. Starting with KS Digital, fee revenue in the 2nd quarter was $93,000,000 which was down 4% year over year, but up 5% sequentially. Digital subscription and licensee revenue was $35,000,000 in the 2nd quarter, which was up 7% year over year and accounted for approximately 38% of fee revenue for the quarter. New business for KF Digital was strong at $105,000,000 which was up 11% year over year with $45,000,000 or about 43% coming from subscription and licenses. The overall pipeline for digital remains healthy as we head into the second half of the fiscal year.
Digital's adjusted EBITDA margin was also strong in the quarter, growing to 31.4%, driven by sequential fee revenue growth and disciplined cost management. For consulting, fee revenue in the 2nd quarter was $167,000,000 which was down 6% year over year and flat sequentially, primarily due to a growing mix of longer larger $1,000,000 plus contracts in our backlog and the overall slower delivery of backlog assignments driven by our clients. Consulting's average bill rate was $4.19 per hour in the 2nd quarter, which was up 1% year over year. Adjusted EBITDA margin remained sequentially stable for consulting and increased 120 basis points year over year to 17.5 percent, driven by higher bill rate, greater consultant and execution staff productivity and disciplined cost management. Total (EPA:TTEF) fee revenue for professional search in interim in the Q2 was $121,000,000 down $17,000,000 or 12% year over year and flat quarter sequential.
Fee revenue trends for permanent placement professional search continued to stabilize in the Q2 with fee revenue contracting 5% year over year, but flat sequentially. Consultant productivity in the Q2 for professional search also increased to $690,000 annualized and was up 21% measured year over year. Interim fee revenue was $68,000,000 for the 2nd quarter, which was down 14% $14,000,000 or 17% year over year, in line with the broader industry, but industry slowdown in demand, Interim's average bill rate increased to $140 per hour, which is up 11% from 1 year ago and is reflective of the added value of being part of the broader Korn Ferry ecosystem. Adjusted EBITDA margin for professional search and interim improved both sequentially and year over year to 22.5% in the 2nd quarter, driven primarily by disciplined cost management. Moving on to recruitment process outsourcing.
Fee revenue in the 2nd quarter for RPO remained stable at $88,000,000 which was flat year over year and quarter sequential. Total revenue under contract at the end of the Q2 was $659,000,000 with approximately $296,000,000 or 45% to be recognized within the next 4 quarters. In the Q2, we saw a return to historical experience with 60% of the $101,000,000 in new business coming in the form of new clients. The adjusted EBITDA margin for RPO improved again to 14.7% in the 2nd quarter, driven by both greater execution staff productivity and disciplined cost management. Finally, global fee revenue in the 2nd quarter for executive search was 206,000,000 dollars up 2% year over year and essentially flat quarter sequential.
The number of new executive search assignments increased 2% year over year and by 1% sequentially to 1567, while consultant productivity remained steady at $1,500,000 per consultant annualized. Adjusted EBITDA and adjusted EBITDA margin were both up materially, up 29% 27%, respectively, year over year. I will now turn the call back over to Bob to discuss our outlook for the Q3 of fiscal 'twenty five.
Bob, CFO, Korn Ferry: Great. Thanks, Tiffany. Over the last several quarters, our new business trends have been a little choppy month to month within a quarter, but we have seen the overall quarterly trend stabilizing. Exiting the 2nd quarter and entering the 3rd, new business was up 1% year over year in October. In November, despite having fewer billing days, was essentially in line with expectations.
December is the most seasonally weak month of our fiscal year. And this year, given that the year end holidays are all in the middle of the week, our guidance reflects fewer working days for our consultants and clients than you would see with normal seasonality. Assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates, we expect fee revenue in the Q3 of fiscal 2025 to range from $635,000,000 to $665,000,000 our adjusted EBITDA margin to remain approximately 16.5 percent to 17.3 percent and our consolidated adjusted diluted earnings per share to range from $1.06 to $1.18 Finally, we expect our GAAP diluted earnings per share in the first quarter to range from $1.02 to $1.16 In closing, we're tremendously proud of what we accomplished for the first half of fiscal twenty twenty five. While we have the U. S.
Presidential election behind us, there are still many contingencies in the current operating environment. As I started, we will continue to deal with these uncertainties proficiently and continue to manage what is in our control. Our unique portfolio of human capital solutions built in our unique science backed services and solutions makes us the leading organizational consultancy, helping companies navigate the war for the best fit for purpose and fit for organization talent, positioning us for continued success going forward. And I'll conclude with my normal remarks. As I always say, we're at the beginning of what is going to be a very long ballgame and I truly believe our best is yet to come.
With that, we would be glad to answer any questions you may have.
Leah, Conference Operator: And we go to Trevor Romeo with William Blair. Please go ahead.
Melissa McMahon, Analyst, William Blair: Hi, team. This is Melissa McMahon on for Trevor Romeo today. Thanks so much for taking my questions. Now I know that you typically see a seasonal decline in the Q3, but it'd be great to get any more color on your expectations for revenue trends by segment that you're including in guidance for the Q3. And additionally, just much revenue you are assuming in guidance from the Trilogy acquisition?
Tiffany, Segment Leader, Korn Ferry: Thanks.
Gary Burnison, CEO, Korn Ferry: Well, as we get into larger addressable markets, particularly consulting and interim, I do think you're going to see the seasonality, the cyclicality deepen for sure. I look at this quarter for the Q3 and we think there's probably the way that the holidays fall, as Bob pointed out, including Chinese New Year, we think we're going to be short 3 to 4 days, which probably translates into $30,000,000 $40,000,000 revenue impact in the quarter. So that's reflected in our guidance. And when you look at the last couple of years between the second and the third quarter, you would see that we would be down 5% or 6 percent. And that's clearly what we're reflecting in the guidance and it reflects the additional days we think we're going to lose in the quarter, particularly in the interim and consulting businesses.
In terms of Trilogy, we think that it will contribute in this quarter maybe $14,000,000 $15,000,000 something like that for the quarter. And we're really excited about that and we'll see what it brings for the year.
Melissa McMahon, Analyst, William Blair: Great. I really appreciate that color. And then maybe just to piggyback off of that, it'd be great if you could talk about the Trilogy acquisition and the opportunity that you see for Interim business in Europe. And just kind of what gave you the confidence to invest more in Interim when you're still seeing a bit of a challenging revenue trend in that area?
Gary Burnison, CEO, Korn Ferry: Yes, for sure. Well, at some point, that's going to turn. I mean, this has been a very unusual cycle. I mean, we're the temp penetration rate has been declining for, you could call it 32 months. I mean, it's something that we haven't seen in history.
And it's been a cycle where it's been slow to fire, slow to hire, and companies have cut back on temporary workers for a long, long time, ordinarily, you'd have seen a recession. But this labor market has been quite unusual over the last 2 years. Having said that, I don't think there's a structural change and it is a large addressable market. And we've shown that it is highly synergistic to the Korn Ferry brand and what we can do with it. And for us, it's about continued earnings trajectory.
And this is a large addressable market. And we really didn't have a presence in EMEA to speak of. Trilogy gives us a foundation to tap, which is arguably the largest piece of that interim market in EMEA. So we've been looking for 2 to 3 years around a partner that we could use in EMEA and we found 1 and I'm really happy with the caliber of people we have and what we can do with that business in the long term.
Bob, CFO, Korn Ferry: And Gary, this is Bob. The only thing I would add to that is we're focused on executing our strategy and we're going to do that through good times, bad times, over the cycles are. So I don't think you would see us stop or start what we're doing in terms of strategy execution, given the cycles that we're in, which is continuing to drive what we deeply believe in.
Melissa McMahon, Analyst, William Blair: Great. Thank you both so much.
Leah, Conference Operator: Next (LON:NXT) we go to the line of Tobey Sommer with Truist Securities. Please go ahead.
Jasper Miban, Analyst, Truist Securities: Sorry, I think I was on mute here. This is Jasper Miban for Tobey. Thanks for taking our question. Just wanted to clarify some of the earlier comments. It sounds like the message is that demand is generally stable.
And if I adjust for the working day headwind, you talked about in the Trilogy contribution, it seems like revenue is going to be effectively sequentially flat or maybe down a few 1000000 sequentially on a comparable basis in the guide. Is that a fair representation of what you're seeing next couple of months?
Gary Burnison, CEO, Korn Ferry: Yes. I really think the way Thanksgiving fell, like it fell at the end of November, it usually does and it falls in the 3rd week, you got the Chinese New Year. It's going to impact us and it's going to impact our consulting and interim business. The thing that I would point out though that I think is a green shoot is the RPO business. And as Tiffany said, in the quarter, the flash number of new business was similar to what we've seen, but we did see a shift to more new logos and it was about 60% or so.
And in November, it was actually even better. We saw like $70,000,000 of new business in November in RPO and all of that essentially was new logos. So that's an interesting green shoot as we head into calendar 'twenty five.
Mark Marcon, Analyst, Baird: Right. That makes sense.
Jasper Miban, Analyst, Truist Securities: And then could you maybe refresh us on the correlation between M and A and some of your demand streams? And how do you think things picking up on that front in 'twenty five would potentially benefit your business?
Gary Burnison, CEO, Korn Ferry: We tend if you look back historically at what we've done, we've got a 20 year track record here. We would say that there's a good piece of it that is inorganic. And we would tend to think going forward that 40% or so is going to come from inorganic means. And we'll see what that M and A market looks like in 'twenty five. We're very systematic.
We want to make sure that there's a culture fit and that the organization is synergistic with the brand. And we continue to carefully evaluate investment opportunities. I don't think there's going to be any dramatic shift there, but we do have a very, very robust capital base that we can tap into.
Jasper Miban, Analyst, Truist Securities: Got it. Thanks for taking the questions.
Leah, Conference Operator: Next, we go to George Tong with Goldman Sachs. Please go ahead.
George Tong, Analyst, Goldman Sachs: Hi, thanks. Good morning. I wanted to dive a little bit into the digital business. On a constant currency basis, revenues in the quarter fell 5% year over year. I believe this is the Q1 we saw a year over year decline in a while like over a year.
So can you talk a little bit about some of the trends you're seeing on the demand side? What could be driving that inflection to a year over year decline and when you might expect that decline to inflect to positive growth?
Gary Burnison, CEO, Korn Ferry: Well, the new business was very strong. So number 1, I would point to that, it was up 11% or so in the quarter. The impact on revenue is because of our move towards subscription agreements. And I think in the quarter, the new business, it was something like 43% of that new business was subscription agreements. And when is that going to inflect?
I don't think it will inflect this next quarter, but it absolutely will. And what we've done is we are completing a pretty big investment on an integrated technology platform that we call the Korn Ferry Talent Suite. And that's going to enable our clients to seamlessly access all of the different products that we have under there from KFSS to KF Listen to KF Cell. And the other thing that we're working on is to make sure that that is very easily integrated into a couple of the largest HCM providers in the world. So we're continuing to work on that to make sure that it is easily integrated into HCM providers.
We're also looking at partnerships. We continue to work on that and there's 2 of the largest in the world that we're very active with, 1 on the go to market side and then 1 in terms of integrating our IP into what they're offering. So it won't happen this quarter, but I have like total confidence. We've got a new leadership team in place. We've made significant investments, CapEx investments into the technology platform.
The new business was good in the quarter. We've got a tough compare in the Q3 compared to a year ago. So I'm pretty bullish on that. But it's this is a marathon. It's not a race.
But so far, I feel very, very good about it.
Bob, CFO, Korn Ferry: Hey, George, this is Bob. If you remember when we were at your conference, it was one of Matisse's growth levers that he talked about was the single sign on platform And that's Gary is referring to. And I think we're probably looking at that being completed somewhere in the next kind of up to 12 month period of time. It's a pretty big lift what he's undertaking. But it is essential to do everything that Gary just laid out.
George Tong, Analyst, Goldman Sachs: Got it. Yes, that's very helpful color. And then on the consulting side, you mentioned you're seeing larger contracts and as a result, slightly longer implementation times and that perhaps contributed to the 7% decline you saw on a constant currency basis year over year. Can you elaborate a little bit more about that on that? When might you expect the sort of the larger contract impact to begin to taper away?
And similar to the digital side, how would you characterize the demand environment for consulting?
Gary Burnison, CEO, Korn Ferry: Well, I think the environment overall, look, it's been a couple of years now of companies. Growth has become elusive and everybody's kind of followed the same playbook of cutting costs, right? I mean, the cost of living for all people in the United States has gone up 40%. And at the beginning, coming out of the pandemic, companies were raising prices, shrinking packaging and volume was going down. There's only so long you can raise prices.
And so companies have been brutal on the cost side. And that's the environment that we've been operating in for a couple of years. There has been a significant change in our the mix of our consulting business that was absolutely by design. I think it's still going to take a couple of quarters for us to really to get to some normalized level. But just to give you some numbers behind that, when you look at our backlog today for deals over $1,000,000 a third that's 33% of the backlog.
And when you look at the new business in this last quarter compared to 2 years ago, new business for deals over $1,000,000 that doubled. And so that's been a big, big change in that consulting business. And the reality is that given the macro environment that companies have been slower on drawing down commitments that they've made for obvious reasons. And the bigger engagements,
Bob, CFO, Korn Ferry: those
Gary Burnison, CEO, Korn Ferry: definitely take longer to implement. So you're seeing that in the numbers for sure as well as the macro environment.
Bob, CFO, Korn Ferry: Hey, Gary, it's Bob. George, the one bit of color I would add to that is we're not seeing clients cancel or what we would call breakage on those deals. It's just a slower pace of consumption.
George Tong, Analyst, Goldman Sachs: Got it. Very helpful color. Thank you.
Leah, Conference Operator: Next, we go to the line of Josh Chan with UBS. Please go ahead.
Josh Chan, Analyst, UBS: Hi. Thank you for taking my questions. I'm waiting for a minute here. Do you think that the business is impacted by kind of a less labor turnover, meaning people are staying in their seats for longer and there's less perhaps need for some of the services that you're offering or do you think that it's not as related to this labor turnover slowdown?
Gary Burnison, CEO, Korn Ferry: Well, look, this is a very unusual cycle. So you dial the clock back almost 5 years now and the world stopped and people slashed payroll and all of that and then there was this great resignation and massive hiring. This is definitely a different cycle by most labor market indications, as you know, there would have been a so called recession by now. To see the temp penetration rate fall for basically 32 quarters is pretty unusual. To look at the U.
S. And see how they've revised the labor numbers a couple of different times, one time bringing it down by 800,000 jobs. The U. S. Is probably, I would think, it's going to produce 100,000, 150,000 jobs a month for the next few months.
I don't really see that changing. Peak 65 is hitting, where the number of people in the United States that are turning 65 is going to contribute to 4000000 or 5000000 people leaving the workforce. So I think that's positive. It's been a look, it's been 2 years of a very unusual environment. There is on the part of our clients some optimism, particularly in the United States going into 2025.
But you can just see it in every company's results. The good news for us is when I look at the RPO business that was green shoots that we've seen recently. And in the industrial business, which is a big part of Korn Ferry, it's almost 30%. We've seen positive trends in the industrial sector for us, which is also good. I don't think there's any real structural changes that would have a negative impact on our business.
I think it's been more of a sign.
Josh Chan, Analyst, UBS: Yes. Thanks for that. And it is definitely really unusual. I want to kind of follow-up on the green shoots comment because I guess what do you make of the green shoots happening in the RPO business first? Because normally you would think that maybe interim will see it first, but that's actually the most challenged business now.
So how do you what do you make of kind of everything being turned upside down a little bit?
Gary Burnison, CEO, Korn Ferry: Yes. Well, what we saw in the great resignation is the hardest some of the hardest positions to fill were actually recruiters. And so you saw a massive increase in hiring everywhere and including in shared service areas such as HR. And what happened was, I called it a couple of years ago, labor hoarding. And that's exactly what happened was when there were less mandates to fill, something that I hadn't predicted was the outsourcing business, you would think in an environment like that where people are cost conscious, the outsourcing business would actually flourish, well, it didn't.
And companies took the reduced mandates and they filled it with internal HR staff. Well, the reality is I think there's only so long you can do that in this slow to fire, slow to hire environment. And so I think that's positive. I think in this quarter, the temp market is not going to change, particularly given what I think is 3 or 4 less business days. But at some point, that is going to change.
I don't see a structural change in the use of fractional executives, interim executives. I just don't. I don't see that. So, yes, I do think it is good and we'll see if that continues. We're pretty bullish on that, on what we can do with the RPO pipeline that we have right now.
Bob, CFO, Korn Ferry: And Gary, this is Bobby. A little bit of color I would add to that. Josh, you've heard Gary talk in the past about investing into what we see as large opportunities in the healthcare market. And we're that's what we're seeing in the month of November and RPO is expansion into that vertical.
Josh Chan, Analyst, UBS: Great. Yes. Thank you both for the color and good luck in the Q3.
Leah, Conference Operator: And our final question comes from Mark Marcon with Baird. Please go ahead.
Mark Marcon, Analyst, Baird: Hey, good morning and happy holidays. Wondering if you can talk a little bit more about a couple of different dynamics. 1, Bob and the whole team, you've done a great job in terms of keeping the profitability up. I'm wondering if you can talk a little bit about some of the sources of the margin improvement, particularly in the areas where you've seen revenue declines. So if I take a look, as an example at professional search and interim, I think it's really a neat trick that you've been able to improve the profitability on an absolute basis while revenue is down.
And I'm just wondering, what are some of the sources that you're that's driving your ability to do that? And to what extent are you is it back office functions relative to front office functions or is it efficiency in terms of travel and real estate and things of that nature?
Gary Burnison, CEO, Korn Ferry: Well, it's all of the above, but it's clearly the travel real estate. But we made a very conscious decision well over a year ago that we wanted the environment as it's played out is exactly what I thought a year ago September, not a couple of months ago, but 14, 15 months ago. And we made a decision that we would focus on profitability. And so we made some tough decisions a year ago and we pivoted the portfolio towards more profitable work and you see it in the mix. You see it in the for example, the rate per hour on the interim side.
It's gone up to like $140 an hour. Now the Trilogy will bring that down for sure, given that a large part of that, almost all of it is in EMEA. So that will come down in the Q3 because of the different compensation levels. But candidly, it's because of decisions we've made and also trying to pivot those businesses really to penetrate our marquee and regional accounts. So it's been what you're seeing right now are decisions that we made 15 months ago for sure.
No question about it.
Bob, CFO, Korn Ferry: And Mark, this is Bob. The other thing I would add for it too, remember as we buy these businesses, their EBITDA margins are kind of mid to high single digit. And again, our company has been built to be plug and play. And so as we integrate these businesses in, we're able to shed costs as well as and that contributes, I mean it's not a huge driver, but it does contribute to our ability to create more earnings in that business.
Mark Marcon, Analyst, Baird: Great. I was just wondering if it's related to primarily the things we talked about in terms of shutting some costs, particularly in terms of the back office functions and to what extent it may end up being producers that you decide to that aren't at the levels that you want them to be or they're basically targeting areas that you don't you're not as interested in?
Gary Burnison, CEO, Korn Ferry: Yes, I would say 2 thirds is like in the quarter, we brought on across the entire platform almost 70 front office consultants across all of Korn Ferry. But when you look at the consultant count and everything, it will appear like it's down or flat. So we're actively managing the business, actively managing the workforce. So, honestly, I think the real estate and the travel is a very, very, very, very small piece of it. And as Bob said, the back office for sure and things that we integrate, but that's also, you're not talking about much money.
I think really 2 thirds of it is around the people and the strategy and where we allocate those resources towards which clients.
Bob, CFO, Korn Ferry: I think that's right. In the markets, we come out of the pandemic recovery. One of the things that we're doing a much better job at nowadays is rebalancing our workforce, making sure we've got resources where the client demand needs are. And that's been something we've been at for a number of years now, just proactively managing it, and you're seeing some of that in our increased productivity.
Mark Marcon, Analyst, Baird: Yes. I mean, it really stands out. I was also just wondering, and I'm not trying to I mean there's no way anybody is going to criticize the margin improvement. That's been spectacular. The one thing I was wondering about is are you seeing the same lift that you would have expected in terms of on the interim side, in terms of clients being more responsive because now whether it's Lucas or whichever or Patina, they're under the Korn Ferry brand and therefore they can command a higher level of attention both in terms of clients as well as recruits?
Or was that is that not as powerful?
Gary Burnison, CEO, Korn Ferry: No, it's very powerful, Mark. It's very powerful. And we're starting to see it even with our most recent investment that I'm really excited about with Trilogy. Absolutely. You're absolutely seeing that.
And the level of, I don't use the term cross sales, but it's when I look at that cross referrals, it's I mean, you're talking 100 of engagements that have resulted from the platform of Korn Ferry. In a market, let's face it, that staffing market is down. Look at all the competitors, you pick it, but it could be anywhere down from 15% to 20%. And you look at the RPO market and it's a market where you look at competitive landscape, that thing was down 20% to 30%. So it's been a really brutal environment for a couple of years and we have to pivot towards growth.
We have to pivot towards increasing earnings and we see a larger addressable market that's synergistic and when those colleagues join us, there is that lift that you're talking about. That is true.
Bob, CFO, Korn Ferry: And Mario, just one more bit of color on that. I would focus on the hourly rate. I mean, that's part of that's driven by being part of our ecosystem, right? That was $126 last year, dollars 140 last year. No, that's
Mark Marcon, Analyst, Baird: really impressive. That part's really clear. And I've been Gary and Bob, I think you know, it's like I cover all of these companies and I clearly see that and I've been living it. And this has clearly been a very different environment than during the last 30 years that I've covered this space. So everything that you've said.
Okay. And then on the consulting side, can you just talk a little bit about the new business trends? Because I hear you when you talk about the larger engagements and those take longer to unfold. But how does that impact the new business trends in terms of the decline being a little bit greater on a constant currency basis? And are there any particular practices that you're seeing some softness in?
Like, for example, if we take a look at the DEI practice, I would imagine that that's probably a little bit softer than it was previously. Just anything that you can pinpoint to there? And when would you expect to start seeing an inflection on the consulting side?
Gary Burnison, CEO, Korn Ferry: I don't think it will happen this next quarter, Mark. I think you're going to see I think you'll see a decline for sure, particularly given the seasonality, which I really do believe is 3 to 4 extra days, just the way things are falling. You're right. You're absolutely right on the DE and I. We've seen a big, big fall there.
I mean, back from 'twenty the back half of 2020 2021, you're talking annually probably $50,000,000 at least decline in that business. We are continuing to see good progress on the leadership development front. I can think of one engagement that it could be $30,000,000 $40,000,000 for us, leadership development assignment, transforming an entire workforce. And we can only move as fast as that client wants to move. And so we have in sitting in backlog, that kind of revenue potential, but that's a multiyear assignment.
And that thing is moving slower than I would have thought a year ago. So I think that the mix in terms of larger engagements is a change for us and we have to keep working on the leverage model as well. We have to make sure that that is a little bit more optimal than what it is today. And then we're working on that. Great.
Mark Marcon, Analyst, Baird: And then Gary, you started off by talking about your the new talent suite and bringing together. Can you just add more color in terms of like from a client perspective, what they would see and then how you think that ends up impacting the business just in terms of revenue and margins?
Gary Burnison, CEO, Korn Ferry: I think the biggest thing is what we've heard is they want to be able to have that IP and those products. We had separate products and people were paying per drink, per item off the menu. And that was a problem. And then the other thing that we heard is that our IP and those standalone products, people need to be able to order, make one order off the menu and be able to choose between the appetizer and dessert and the entree, they weren't able to do that. We're changing that and that's what this is all about.
And then the second piece is that it's integrated into arguably the 2 biggest HCM providers. And we're working very hard on one of them to make sure it's totally integrated and we think we'll get that done. It'll probably be the Q3 or so of calendar 2025. It takes some time. But those are the 2 big that's the 2 biggest practical changes that clients will see.
Mark Marcon, Analyst, Baird: And so would you be able to go to this solution and or to whatever the user interface is? And then would you still be buying per the drink for the individual solution or would you basically have an annual subscription for all of the solutions?
Gary Burnison, CEO, Korn Ferry: We hope it's the latter, Mark. That's where we're headed. We hope it's the latter. We're not there yet though. That's the ambition.
Mark Marcon, Analyst, Baird: Okay, great. And then Gary, you've been through lots of different cycles and elections. How do you think the recent change in the U. S. Is going to end up impacting things?
I think most people are assuming that it's going to be a positive in terms of animal spirits and unleashing of the regulatory burdens, but I'm wondering how you see it?
Gary Burnison, CEO, Korn Ferry: Yes. I think that's probably true, although that'll take a couple of years to actually see it. I think the bigger problem is cost of living. And there's not a lot of room to maneuver here because you've got you're losing $2,000,000,000,000 a year. You've got a $38,000,000,000,000 debt load.
I just don't think there is a lot of maneuverability. So I'm looking at it and saying probably over the next 2 quarters, I just don't see things materially changing in the labor market. I just don't see it. I don't think there's that level of maneuverability. But I do think that there is some what I'm hearing, there is optimism around the regulatory burden, but I think that's to see the impact of that I think is a couple of years out.
Mark Marcon, Analyst, Baird: Okay, great. Appreciate all the comments and congrats in terms of the margins. That's fantastic.
Gary Burnison, CEO, Korn Ferry: Thanks, Mark.
Leah, Conference Operator: We have no further questions, Mr. Burnison.
Gary Burnison, CEO, Korn Ferry: Okay, Leah. Listen, I'm season's greetings, happy holidays. I'm incredibly proud of our organization and our colleagues. And I think at the end of the day, and I think we've demonstrated this in a rough environment over almost 24 months, it results in a Korn Ferry, which is less cyclical, more balanced, and I think it provides for sustainable success. So with that, I'll conclude.
Happy holidays,
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